Get More Updates From Caultimates.com Join with us : http://facebook.com/groups/caultimates Basic Concepts of Indirect Taxes 5 BASIC CONCEPTS OF INDIRECT TAXES INTRODUCTION Background In any Welfare State, it is the prime responsibility of the Government to fulfill the increasing developmental needs of the country and its people by way of public expenditure. India, being a developing economy, has been striving to fulfill the obligations of a Welfare State with its limited resources; the primary source of revenue being the levy of taxes. Though the collection of tax is to augment as much revenue as possible to the Government to provide public services, over the years it has been used as an instrument of fiscal policy to stimulate economic growth. Thus, taxes are collected to fulfill the socio-economic objectives of the Government. What is a tax? A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the Government, a payment exacted by legislative authority. A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority". In simple words, tax is nothing but money that people have to pay to the Government, which is used to provide public services. Direct and Indirect Taxes Taxes are broadly classified into direct and indirect taxes. Direct Taxes: A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The significant direct taxes imposed in India are income tax and wealth tax. Indirect Taxes: If the taxpayer is just a conduit and at every stage the tax-incidence is passed on till it finally reaches the consumer, who really bears the brunt of it, such tax is indirect tax. An indirect tax is one that can be shifted by the taxpayer to someone else. Its incidence is borne by the consumers who ultimately consume the product or the service, while the immediate liability to pay the tax may fall upon another person such as a manufacturer or provider of service or seller of goods. Also called consumption taxes, they are regressive in nature because they are not based on the principal of ability to pay. All the consumers, including the economically challenged bear the brunt of the indirect taxes equally. Indirect taxes are levied on consumption, expenditure, privilege, or right but not on income or property. The significant indirect taxes levied in India are excise duty, custom duty, service tax, central sales tax (CST), value added tax (VAT), octroi, entry tax, purchase tax and the like. Economists world over agree that direct and indirect taxes are complementary and therefore, a rational tax structure should incorporate in itself both types of taxes.
Basic Concepts of Indirect Taxes 6 TAX DIRECT TAX The person paying the tax to the Government directly bears the incidence of the tax. Progressive in nature-high rate of taxes for people having higher ability to pay. Direct Tax Burden of tax borne by the person himself INDIRECT TAX The person paying the tax to the Government collects the same from the ultimate consumer. Thus, incidence of the tax is shifted to the other person. Regressive in nature- All the consumers equally bear the burden, irrespective of their ability to pay. Indirect Tax Burden of tax shifted to another person The different types of direct and indirect taxes are presented below: TAXES Indirect taxes Direct Taxes Goods Services Income Tax Wealth Tax Other Excise Duty (on manufacture) Customs Duty (on imports/ exports) Service tax Tax on Income Tax on Wealth Interest tax/expenditure tax CST (on inter-state sale) Sales tax/vat (on sales within the State) Other/Misc. (Octroi, Entry tax)
Basic Concepts of Indirect Taxes 7 Features of indirect taxes (i) An important source of revenue: Indirect taxes are a major source of tax revenues for Governments worldwide and continue to grow as more countries move to consumption oriented tax regimes. In India, indirect taxes contribute more than 50% of the total tax revenues of Central and State Governments. (ii) Tax on commodities and services: It is levied on commodities at the time of manufacture or purchase or sale or import/export thereof. Hence, it is also known as commodity taxation. It is also levied on provision of services. (iii) Shifting of burden: There is a clear shifting of tax burden in respect of indirect taxes. For example, VAT which is paid by the seller of the goods is recovered from the buyer by including the tax in the cost of the commodity. (iv) No perception of direct pinch: Since, value of indirect taxes is generally inbuilt in the price of the commodity, most of the time the tax payer pays the same without actually knowing that he is paying tax to the Government. Thus, tax payer does not perceive a direct pinch while paying indirect taxes. (v) (vi) (vii) Inflationary: Tax imposed on commodities and services causes an all-round price spiral. In other words, indirect taxation directly affects the prices of commodities and services and leads to inflationary trend. Wider tax base: Unlike direct taxes, the indirect taxes have a wide tax base. Majority of the products or services are subject to indirect taxes with low thresholds. Promotes social welfare: High taxes are imposed on the consumption of harmful products (also known as sin goods ) such as alcoholic products, tobacco products etc. This not only checks their consumption but also enables the State to collect substantial revenue. (viii) Regressive in nature: Generally, the indirect taxes are regressive in nature. The rich and the poor have to pay the same rate of indirect taxes on certain commodities of mass consumption. This may further increase the income disparities between the rich and the poor. Constitutional provisions India has a three-tier federal structure, comprising the Union Government, the State Governments and the Local Government. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The Constitution of India is the supreme law of India. It consists of a Preamble, 22 parts containing 444 Articles and 12 Schedules. Power to levy and collect taxes whether, direct or indirect emerges from the Constitution of India. In case any tax law, be it an act, rule, notification or order is not in conformity with the Constitution, it is called ultra vires the Constitution and is illegal and void. Thus, a study of the basic provisions of the Constitution is essential for understanding the genesis of the various taxes being imposed in India. The significant provisions of the Constitution relating to taxation are: (i) Article 265: Article 265 of the Constitution of India prohibits arbitrary collection of tax. It states that no tax shall be levied or collected except by authority of law. The term authority of law means that tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. (ii) Article 245: Part XI of the Constitution deals with relationship between the Union and States. The power for enacting the laws is conferred on the Parliament and on the Legislature of a State by Article 245 of the Constitution. The said Article provides as under: (i) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. (ii) No law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.
(iii) (iv) Basic Concepts of Indirect Taxes 8 Article 246: It gives the respective authority to Union and State Governments for levying tax. Whereas Parliament may make laws for the whole of India or any part of the territory of India, the State Legislature may make laws for whole or part of the State. Seventh Schedule to Article 246: It contains three lists which enumerate the matters under which the Union and the State Governments have the authority to make laws. LIST -I LIST II LIST -III UNION LIST STATE LIST CONCURRENT LIST It contains the It contains the It contains the matters in respect matters in respect matters in respect of of which the of which the State which both the parliament Government has Central & State (Central Government have government) has the exclusive right to make laws. the exclusive right to make laws. power to make laws. Entries 82 to 92C of List I enumerate the subjects where the Central Government has power to levy taxes. Entries 45 to 63 of List II enumerate the subjects where the State Governments have the power to levy taxes. Parliament has a further power to make any law for any part of India not comprised in a State even if such matter is included in the State List. The table given below enlists the significant direct as well as indirect taxes being levied in India under the various Entries of the Union and State Lists. There is no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation). S. No. Union List (List I) State List (List II) (i) Income tax Entry 82 - Taxes on income other than agricultural income State Level VAT Entry 54 - Taxes on the sale or purchase of goods (excluding newspapers) except tax on (ii) (iii) (iv) Customs Duties Entry 83 - Duties of customs including export duties Central Excise Duties Entry 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or opium/indian hemp/narcotic drugs/narcotics Wealth Tax Entry 86 - Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies inter-state sale or purchase State Excise Duties Entry 51 - Duties of excise on alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs and narcotics. The entry does not include duties of excise on medicinal and toilet preparations containing alcohol or opium/indian hemp/narcotic drugs/narcotics
Basic Concepts of Indirect Taxes 9 (v) (vi) (vii) Central Sales Tax Entry 92A - Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-state trade or commerce Service Tax Entry 97 - Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists Entry 92C - Tax on services [Amendment passed by the Parliament on 15.1.2004, but yet not made effective] Principal indirect taxes The principal central and state level indirect taxes being levied in India along with the relevant statutes are tabulated below: Tax Relevant Statute Particulars Central Excise Act, 1944 Central Excise Tariff Act, 1985 Excise Duty [Central Value Added Tax (CENVAT)] Customs Duty Customs Act, 1962 Customs Tariff Act, 1975 Service Tax Chapter V and VA of the Finance Act, 1994 A tax on the manufacture or production of goods in India imposed by the Central Government. Basic General rate: 12% A duty imposed by the Central Government on goods imported into/exported out of India. Basic General Rate: 10% + Additional duty of customs (CVD) equivalent to the excise duty levied on like goods produced in India (12%) + Special additional duty of customs @ 4%. A tax imposed by the Central Government on the services (except the services covered in the negative list of services and exempted services) Rate: 12% Central Sales Tax Central Sales Tax Act, 1956 A tax on the inter-state sales of goods, imposed by the Central Government but appropriated by the originating State. Rate: 2% Value Added Tax VAT Acts of respective State Governments A tax on the intra-state sales of goods, imposed by the State Governments. Rate generally at 5% and 12.5% /13.5% Besides these, there are other indirect taxes like entry tax, luxury tax, entertainment tax etc. levied by the State Governments. Municipal or local authorities also impose taxes like octroi or local area taxes. In this Chapter you will learn the basic concepts relating to levy, taxable event and other related provisions in respect of central excise duty, customs duty, service tax, central sales tax and value added tax.
Basic Concepts of Indirect Taxes 10 Administration of indirect taxes The Department of Revenue of the Ministry of Finance exercises control in respect of matters relating to all the direct and indirect taxes through two statutory Boards, namely, the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC) respectively. Matters relating to the levy and collection of all the direct taxes (income tax, wealth tax etc.) are looked after by CBDT, whereas those relating to levy and collection of central indirect taxes (customs duties, central excise duties, service tax) fall within the purview of CBEC. The two Boards have been constituted under the Central Board of Revenue Act, 1963. CBEC deals with the tasks of formulation of policy concerning levy and collection of customs and central excise duties and service tax, prevention of smuggling and administration of matters relating to customs, central excise, narcotics to the extent under CBEC's purview and service tax. The Board is the administrative authority for its subordinate organizations, including Custom Houses, Central Excise and Service Tax Commissionerates. The State level indirect taxes are administered by Commercial Tax Departments of the respective States.